Global Economics

Motorola Battles for Survival vs Second-Tier Asian Vendors

With a collapse in its share of handsets to just 6% of the market, can Motorola avoid becoming a second-tier cell-phone vendor?

Tier two handset makers, mainly from east Asia, grabbed some market share from the majors in the first quarter, because of the market shift towards emerging economies and ultra-low cost models.

However, their progress is expected to be short-lived as Nokia and Samsung adjust their product/pricing mixes and the economy picks up.

The burning question, though, is whether Motorola can avoid becoming a tier two phone-maker itself, with its market share collapsing to just 6% in the first quarter, compared to 18% just two years ago and well over 20% for the years before that.

With no credible smartphones to offer in the most resilient part of the market, Motorola is not really competing head-to-head with the rest of the big four, and certainly not with the smartphone specialists RIM, Palm and Apple.

It revealed a little more detail of its make-or-break Android line, with the first model, codenamed Calgary, scheduled for the third quarter. But the early leaks about Calgary do not suggest it will be a stand-out phone—according to the BoyGenius Report it will be a CDMA slider phone with a Qwerty keyboard that will launch with Verizon.

So it will have to compete for share with other Android models like HTC Magic and Dream, Samsung I7500 and forthcoming Sony Ericsson devices.

This leaves Motorola, for now at least, increasingly lined up against the tier two vendors, and that means a price and volume war, for which its supply chain and economies of scale are ill-equipped, unlike those of Nokia and Samsung when they play at the low end.

Tier two handset makers shipped 80.5 million units last year, according to ABI Research—only around 6.5% of the total, but putting price and market share pressure on the majors, as seen in their falling ASPs.

In the first quarter, Motorola shipped 14.7 million handsets in the quarter, down from 27.4 million units a year earlier, a huge 46% drop that dwarfed even the suffering Sony Ericsson's. Sales for the handset unit were down 32% year-on-year to $1.8 billion and the operating loss grew to $509 million from $418 million.

Handsets are now just one-third of Motorola's total sales, rather than the dominant part of the business they were two years ago, but the other two divisions are not showing the same strength as they did in 2008.

For the company as a whole, sales were down at almost the same year-on-year rate as handsets, down 28% to $5.4 billion (below analyst expectations of $5.6 billion) while the net loss widened from $194 million last year to $231 million.

Sales in the Home and Networks Mobility business, now Moto's largest, fell 16% to $2 billion while the Enterprise Mobility unit saw an 11% drop in revenues to $1.6 billion. The figures show how the balance of the company's revenues has shifted, with all three units now roughly the same size, but the co-CEOs are still sticking to their plan to spin off handsets eventually, though of course no date is given.

The cost cutting program is making progress but has eaten into Motorola's cash position, with cash and short term investments as of March 31 falling from $7.4 billion three months earlier, to $6.1 billion. This was blamed on "a $700 million reduction in accounts receivable sold and approximately $200 million in restructuring related payments."

Jha said: "We significantly reduced the operating loss in Mobile Devices compared with the fourth quarter of 2008 and have increased the 2009 annual cost reduction target to more than $1.3 billion."